nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒03‒17
twenty-six papers chosen by
Peren Arin
Massey University

  1. Electoral Rules and Government Spending in Parliamentary Democracies By Torsten Persson; Gerard Roland; Guido Tabellini
  2. Comparing Public Attitudes Towards Providing for the Livelihood of the Elderly in Two aging Sodieties: Germany and Japan By Bernd Hayo; Hiroyuki Ono
  3. Taxing Capital? Not a Bad Idea After All! By Juan Carlos Conesa; Sagiri Kitao; Dirk Krueger
  4. Schools and Location: Tiebout, Alonso, and Government Policy By Eric A. Hanushek; Kuzey Yilmaz
  5. On redistribution effects of public debt amongst single-minded generations By Canegrati, Emanuele
  6. Intergovernmental transfers and fiscal effort in Peruvian local governments By Aragon, Fernando; Gayoso, Vilma
  7. Optimal taxation and social insurance in a lifetime perspective By Bovenberg,Lans; Sorensen,Peter Birch
  8. Basic Strategies For The Role Of Indonesian Central-local Government In Poverty Alleviation Programs By Kodrat Wibowo
  9. Compact or Spread-Out Cities: Urban Planning, Taxation, and the Vulnerability to Transportation Shocks By François Gusdorf; Stéphane Hallegatte
  10. Pension Provision and Retirement Saving: Lessons from the United Kingdom By Richard Disney; Carl Emmerson; Matthew Wakefield
  11. Horizontal Interaction on Local Councils' Expenditures. Evidence from Italy By Barbara ERMINI; Raffaella SANTOLINI
  12. Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan: Causes, Consequences, and Linkages with the Formal Economy By Kemal, M. Ali
  13. Conditional cooperation on three continents By Martin G. Kocher; Todd L. Cherry; Stephan Kroll; Robert J. Netzer; Matthias Sutter
  14. Competing for Capital When Labour is Heterogeneous By Sato, Yasuhiro; Thisse, Jacques-François
  15. Pensions, Education and Life Expectancy By Michael Gorski; Tim Krieger; Thomas Lange
  16. Procyclicality or Reverse Causality? By Dany Jaimovich; Ugo Panizza
  17. Public Policy and Venture Capital Financed Innovation: A Contract Design Approach By Julia Hirsch
  18. Retirement Saving in Australia By Garry Barrett; Yi-Ping Tseng
  19. How did the Elimination of the Earnings Test above the Normal Retirement Age affect Retirement Expectations? By Pierre-Carl Michaud; Arthur van Soest
  20. Comparative urban institutions and intertemporal externality: a revisit of the Coase conjecture By Deng, Feng
  21. Efficiency of stability-oriented institutions: the European case By Fabrice Capoen; Jerome Creel
  22. Are Lives a Substitute for Livelihoods? Terrorism, Security and US Bilateral Imports By Mirza, Daniel; Verdier, Thierry
  23. Projecting Behavioral Responses to the Next Generation of Retirement Policies By Alan L. Gustman; Thomas Steinmeier
  24. Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market By Kristopher Gerardi; Harvey S. Rosen; Paul Willen
  25. Too Expensive to Meter: The influence of transaction costs in transportation and communication By David Levinson; Andrew Odlyzko
  26. The Benefits and Costs of Head Start By Jens Ludwig; Deborah A. Phillips

  1. By: Torsten Persson; Gerard Roland; Guido Tabellini
    Date: 2007–03–14
  2. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Hiroyuki Ono (Faculty of Economics, Toyo Universtiy)
    Abstract: This paper studies attitudes about who should provide for the livelihood of the elderly in two aging societies, namely Germany and Japan. Applying an ordered logit model to individual data from representative public opinion surveys, it is analysed which socio-demographic, economic or political variables help to explain people’s attitudes on whether the government or individuals should be responsible for the livelihood of the elderly. We find that while higher income makes people more inclined towards the individual option, age is found to do the opposite in both countries. We conjecture that this age effect is related to the level of knowledge about the current situation of the public pension system. We also find that the part-time work status significantly affects attitudes in both countries, but not the same way. It affects adversely the inclination towards a government-based pension system in the case of Japan but positively in Germany. Other significant influences are the pensioner status of the respondents in Japan and their political position in the case of German data.
    Keywords: Livelihood of elderly, pension reform, public attitudes, aging societies, Germany, Japan
    JEL: H55 Z10
    Date: 2007
  3. By: Juan Carlos Conesa (Universitat Autonoma de Barcelona); Sagiri Kitao (New York University); Dirk Krueger (University of Frankfurt, CEPR, CFS and NBER)
    Abstract: In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that the optimal capital income tax rate is not only positive, but is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of $35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system.
    Keywords: Progressive Taxation, Capital Taxation, Optimal Taxation
    JEL: E62 H21 H24
    Date: 2006–10–06
  4. By: Eric A. Hanushek; Kuzey Yilmaz
    Abstract: An important element in considering school finance policies is that households are not passive. Instead they respond to policies with a combination of modified residential choice and political choice of tax levels. The highly stylized decision models of most existing analyses, however, lead to conerns about the policy evaluations. In our general equilibrium model of residential location and community choice, households base optimizing decisions on commuting costs, school quality, and land rents. With both centralized and decentralized employment, the resulting equilibrium has heterogeneous communities in terms of income and tastes for schools. This model is used to analyze a series of conventional policy experiments, including school district consolidation, district power utilization, and different equalization devices. The important conclusion is that welfare falls for all families with the restrictions in choice that are implied by these approaches.
    JEL: H4 I2 R1 R51
    Date: 2007–03
  5. By: Canegrati, Emanuele
    Abstract: In this paper I will introduce a new political economy model, where there exists a competition amongst two political candidates, which aim to set a policy which enables them to win elections, max- imising the probability of winning. I will show that, if taxes neces- sary to repay the debt are not lump sum but proportional to income, we have dramatic distorting effect on the labour supply. The prob- lem is exacerbate once we take into account that the Government set taxes in order to favour the most in‡uencing social group. As a consequence, effective marginal tax rates are differentiated amongst social groups and thus the burden of public debt is not equally borne.
    Keywords: public debt; single-mindedness; intergenerational redistribution
    JEL: J20 H63 D31 J26 H21 H55 D78 J18 D63 J22 H11 J14 D64 H60 D71 D72 H23
    Date: 2007–03–14
  6. By: Aragon, Fernando; Gayoso, Vilma
    Abstract: The purpose of this paper is to identify the causal relationship between intergovernmental transfers and fiscal effort. Empirical evidence from Peruvian municipalities supports a negative relation. The substitution effect is decreasing on the level of municipalities’ expenditure and tends to disappear for high-expenditure localities. Given this phenomenon, devolving responsibilities to sub-national governments might reduce fiscal effort and deteriorate fiscal balance especially among localities with lower fiscal capacity. A possible solution might be the inclusion of fiscal effort indicators in the intergovernmental transfer design.
    Keywords: fiscal effort; intergovernmental transfers; fiscal decentralization; local taxation
    JEL: H71 H77
    Date: 2005–10
  7. By: Bovenberg,Lans; Sorensen,Peter Birch (Tilburg University, Center for Economic Research)
    Abstract: Advances in information technology have improved the administrative feasibility of redistribution based on lifetime earnings recorded at the time of retirement. We study optimal lifetime income taxation and social insurance in an economy in which redistributive taxation and social insurance serve to insure (ex ante) against skill heterogeneity as well as disability risk. Optimal disability benefits rise with previous earnings so that public transfers depend not only on current earnings but also on earnings in the past. Hence, lifetime taxation rather than annual taxation is optimal. The optimal tax-transfer system does not provide full disability insurance. By offering imperfect insurance and structuring disability benefits so as to enable workers to insure against disability by working harder, social insurance is designed to offset the distortionary impact of the redistributive labor income tax on labor supply.
    Keywords: optimal lifetime income taxation;optimal social insurance
    JEL: H21 H55
    Date: 2007
  8. By: Kodrat Wibowo (Department of Economics, Padjadjaran University)
    Abstract: One consequence of Indonesian fiscal decentralization and regional autonomy is that local governments now have more responsibility to more participate in poverty alleviation programs. Providing better access for local public goods and services is one possible action from local governments in national poverty alleviation programs. This paper tries to propose a basic strategy for the role of Indonesian central-local government in poverty alleviation program that may proper to be implemented within the framework of Indonesian new government system after fiscal decentralization and regional autonomy. One important strategy proposed is role sharing and role switching between central and local governments in designing and implementing market and public-oriented policies. Since the stronger-need participation of local government in poverty alleviation may put local government’s fiscal condition in problem, the objective of wealth-neutral condition does need an appropriate cost-sharing system that will lead to the more financial and political fairness between Indonesian central and local government.
    Keywords: poverty alleviation, decentralization, Indonesia
    JEL: H77 I39
    Date: 2005–04
  9. By: François Gusdorf (CIRED); Stéphane Hallegatte (Centre International de Recherche sur l'Environnement et le Développement Ecole Nationale de la Météorologie)
    Abstract: This paper shows that cities made more compact by transportation taxation are more robust than spread-out cities to shocks in transportation costs. Such a shock, indeed, entails negative transition effects that are caused by housing infrastructure inertia and are magnified in low-density cities. Distortions due to a transportation tax, however, have in absence of shock detrimental consequences that need to be accounted for. The range of beneficial tax levels can, therefore, be identified as a function of the possible magnitude of future shocks in transportation costs. These taxation levels, which can reach significant values, reduce city vulnerability and prevent lock-ins in under-optimal situations.
    Keywords: Urban transportation, Housing, Inertia, Vulnerability, Transportation Taxation
    JEL: R21 R48 H23 H31
    Date: 2007–02
  10. By: Richard Disney; Carl Emmerson; Matthew Wakefield
    Abstract: We describe the trajectory of pension reform in the United Kingdom, which has focussed on keeping the cost of public pension programmes down during a period of steady population ageing whilst attempting to maintain an adequate minimum level of income security for low income households in retirement. Instruments for achieving these aims have been to target public benefits on low income households, permitting individuals to opt out of the second tier of the public programme into private retirement accounts, and the use of tax incentives to encourage additional private retirement saving. Frequent reforms to the pension programme raise the question of whether households can make reasonable private retirement saving provision in the light of growing complexity and potential shortcomings in individual decision-making. This paper sheds some light on these issues.
    Keywords: pensions, social security, retirement saving
    JEL: D91 H55
    Date: 2007–02
  11. By: Barbara ERMINI (Universita' Politecnica delle Marche, Dipartimento di Economia); Raffaella SANTOLINI (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: This paper seeks for public spending interdependence among jurisdictions within some Italian local councils. We find significant positive interaction among spending of neighboring local councils both at the level of total expenditure and also for different subcategories. However, this result applies only when spatial dependence is analyzed among geographically contiguous jurisdictions different criteria of proximity do not give rise to any substantial form of interaction among local governments. Attempts to identifying the source of this interaction seem to refuse yardstick competition hypothesis. Fiscal spill-overs among jurisdictions appear as a more plausible explanation; we also find evidence that local councils partnerships fail to effectively internalize these spill-overs. Finally, commuting affects spatial interdependence among jurisdictions.
    Keywords: local councils partnerships, local public expenditures, spatial econometrics, spill-overs, strategic interaction, yardistick competition
    JEL: C31 D71 D72 H72 H73
    Date: 2007–02
  12. By: Kemal, M. Ali
    Abstract: Rise in the underground economy creates problems for the policy-makers to formulate economic policies, especially the monetary and fiscal policies. It is found that if there was no tax evasion, budgets balance might have been zero and positive for some years and we would not have needed to borrow as much as we had borrowed. It is concluded that the impact of the underground economy is significant to the movements of the formal economy, but the impact of formal economy is insignificant in explaining the movements in the underground economy. In the long run, underground economy and official economy are positively associated. It is estimated that the underground economy ranges between Rs 2.91 trillion and Rs 3.34 trillion (54.6 percent of GDP to 62.8 percent of GDP respectively) in 2005 and tax evasion ranges between Rs 302 billion and Rs 347 billion (5.7 percent of GDP to 6.5 percent of GDP respectively) in 2005. Underground economy and tax evasion were increasing very rapidly in the early 1980s but the rate of increase accelerated in the 1990s. It declined in 1999, but reverted to an increasing trend until 2003. It declined again in 2004 and 2005.
    Keywords: Underground Economy; Tax Evasion
    JEL: H26 E26
    Date: 2007
  13. By: Martin G. Kocher; Todd L. Cherry; Stephan Kroll; Robert J. Netzer; Matthias Sutter
    Abstract: We show in a public goods experiment on three continents that conditional cooperation is a universal behavioral regularity. Yet, the number of conditional cooperators and the extent of conditional cooperation are much higher in the U.S.A. than anywhere else.
    Keywords: conditional cooperation, public goods, experiment
    JEL: C72 C91 H41
  14. By: Sato, Yasuhiro; Thisse, Jacques-François
    Abstract: This paper investigates the impacts of capital mobility and tax competition in a setting with imperfect matching between firms and workers. The small country attracts fewer firms than the large one but accommodates a share of the industry that exceeds its capital share - a reverse home market effect. This allows the small country to be more aggressive and to set a higher tax rate than the large one, thus implying that tax competition reduces international inequalities. However, the large country always attains a higher utility than does the small country. Our model thus encapsulates both the 'importance of being small' and the 'importance of being large'. Last, tax harmonization benefits to the small country but is detrimental to the large one.
    Keywords: capital mobility; fiscal competition; local labour markets; reverse home market effect
    JEL: F21 H31 J31
    Date: 2007–03
  15. By: Michael Gorski (University of Paderborn); Tim Krieger (University of Paderborn); Thomas Lange (Ifo institute for economic research & University of Konstanz)
    Abstract: In a two-period model with agent heterogeneity we analyze a pension reform toward a stronger link between contributions and benefits (as recently observed in several countries) in a pension system with a Bismarckian and a Beveridgian component. We show that such a policy change reduces the educational level in an economy. The life expectancy differential between skilled and unskilled individuals drives this result. Furthermore, we investigate the consequences on the intragenerational redistribution characteristics of the pension system – in the sense of the number of net-recipients relative to net-payers – as well as welfare effects.
    Keywords: social security, education, life expectancy, pension reform, redistribution
    JEL: H55 I21 D39
    Date: 2007–03
  16. By: Dany Jaimovich (Inter-American Development Bank); Ugo Panizza (United Nations Conference on Trade and Development)
    Abstract: There is a large literature showing that fiscal policy is either acyclical or countercyclical in industrial countries and procyclical in developing countries. Most of this literature is based on OLS regressions that focus on the correlation between a fiscal variable (usually the budget balance or expenditure growth) and either GDP growth or some measure of the output gap. This paper argues that such a methodology does not permit the identification of the effect of the business cycle on fiscal policy and hence cannot be used to estimate policy reaction functions. The paper proposes a new instrument for GDP growth and shows that, once GDP growth is properly instrumented, procyclicality tends to disappear.
    Keywords: Fiscal Policy, Business Cycle, Emerging Markets
    JEL: E62 E32 H62
    Date: 2007–03
  17. By: Julia Hirsch (Universidad Iberoamerica and CFS)
    Abstract: The effects of public policy programs which aim at internalizing spill-overs due to successful innovation are analyzed in a sequential double-sided moral hazard doublesided adverse selection framework. The central focus lies in analyzing their impact on contract design. We show that in our framework only ex post grants are a robust instrument for implementing the first-best situation, whereas the success of guarantee programs, ex ante grants and some types of investment grants depends strongly on the characteristics of the project: in certain cases they not only give no further incentives but even destroy contract mechanisms and so worsen the outcome.
    Keywords: Public Policy, Contract Design, Venture Capital, Moral Hazard, Asymmetric Information
    JEL: D82 G24 G32 H25 H81
    Date: 2006–12–08
  18. By: Garry Barrett; Yi-Ping Tseng
    Abstract: Australia’s retirement income system has several distinctive features – most notably a policy of government mandated private saving and a means-tested Age Pension – which have gained increasing international attention. This paper provides an overview of the institutional features of the retirement income system in Australia, including details of the development and operation of the policy of forced retirement saving. The role of the different tiers of system in accounting for the income of the current cohort of seniors is examined using the Australian Bureau of Statistics Household Expenditure Survey. The economic position of adjacent, younger cohorts is also considered. The final section canvasses a selection of reform proposals emerging from the public debate over the future of Australia’s retirement income system.
    Keywords: retirement income, social security, forced saving
    JEL: D91 H55
    Date: 2007–02
  19. By: Pierre-Carl Michaud; Arthur van Soest
    Abstract: We look at the effect of the 2000 repeal of the earnings test above the normal retirement age on retirement expectations of workers in the Health and Retirement Study, aged 51 to 61 in 1992. For men, we find that those whose marginal wage rate increased when the earnings test was repealed, had the largest increase in the probability to work full-time past normal retirement age. We do not find significant evidence of effects of the repeal of the earnings test on the probability to work past age 62 or the expected claiming age. On the other hand, for those reaching the normal retirement age, deviations between the age at which Social Security benefits are actually claimed and the previously reported expected age are more negative in 2000 than in 1998. Since our calculations show that the tax introduced by the earnings test was small when accounting for actuarial benefit adjustments and differential mortality, our results suggest that although male workers form expectations in a way consistent with forward-looking behavior, they misperceive the complicated rules of the earnings test. Results for females suggest similar patterns but estimates are imprecise.
    Keywords: social security earnings test, expectations, retirement, difference in differences, panel data
    JEL: H55 J22
    Date: 2007–02
  20. By: Deng, Feng
    Abstract: Coase originally formulated his conjecture about intertemporal price competition in the context of a land market, but it has been applied almost exclusively to non-spatial markets. This paper revisits the Coase Conjecture in the context of land development and urban institutions. I compare four institutional arrangements based on the combination of land tenure options and local governance forms: private/rental, public/rental, private/owner and public/owner. The two-period model developed in this paper shows that homeownership may result in more land development than leasehold. Numeric examples suggest (1) public/owner, i.e., the common form of government providing collective goods, may be efficient for more uniform distribution of consumer; (2) rentals can be desirable for “poor” communities; (3) private/owner, such as CID (Common Interest Development) and condominium, is more efficient for “rich” communities; (4) restrictive zoning reduces social surplus, and “rich” community may adopt more restrictive measures. These results may help explain why public institutions are dominant in urban setting and why most private communities are small and located in the suburbs.
    Keywords: monopoly; durability; bundling; land; local collective good; public good; private community; urban institutions
    JEL: P48 H41 L22 H77 R52 L12
    Date: 2003
  21. By: Fabrice Capoen (Université de Caen); Jerome Creel (Observatoire Français des Conjonctures Économiques)
    Abstract: Stability-oriented European institutions correspond to the general prescriptions of the ‘new macroeconomics consensus’. This contribution provides an assessment of the pros and cons of these institutions in terms of macro stabilisation and exchange-rate swings drawing on different scenarios. We argue that the institutions which have been associated with the Euro – limits on public deficits and a conservative central bank – have somewhat jeopardized the efficiency of this new exchange-rate regime. Adaptation of institutions is thus needed: either cooperation or coordination may enhance European welfare.
    Keywords: monetary policy, fiscal policy, central bank; stability pact; time-consistency; exchange rate, cooperation, coordination
    JEL: E63 F41 H60
    Date: 2007
  22. By: Mirza, Daniel; Verdier, Thierry
    Abstract: What is the impact of terrorism on trade through higher security at the borders? We set up a theory which shows that the impact goes not only from terrorism to trade; higher trade with a partner might, in turn, increase the probability of terrorism acts and make security measures more costly for total welfare. In order to identify the true impact of terrorism, our theory allows then for a strategy to condition out the latter mechanism. We show in particular how past incidents perpetrated in third countries (anywhere in the world except the origin or targeted country) constitute good exogenous factors for current security measures at the borders. Our tests suggest that terrorist incidents have a small effect on US imports on average, but a much higher effect for those origin countries at the top of the distribution of incidents. In addition, the level of the impact is up to three times higher when the acts result in a relatively high number of victims, the products are sensitive to shipping time, and the size of the partner is small. The paper further shows how terrorism affects the number of business visas delivered by the Unites States, thereby impacting significantly US imports in differentiated products. These results suggest that security to prevent terrorism does matter for trade.
    Keywords: security; terrorism; trade
    JEL: F12 F13
    Date: 2007–03
  23. By: Alan L. Gustman; Thomas Steinmeier
    Abstract: This paper examines retirement and related behavioral responses to policies that on average are actuarially neutral. Many conventional models predict that actuarially neutral policies will not affect retirement behavior. In contrast, our model allows those with high time preference rates to find that the promise of an actuarially fair increase in future rewards does not balance the loss from foregone current benefits. Using data from the Health and Retirement Study, we find that from age 62 through full retirement age, the earnings test reduces full-time work by married men by about four percentage points, or by about ten percent of married men at full-time work. Abolishing the requirements on many jobs that an individual work full-time or not at all, what we term a minimum hours constraint on employment, would induce more than twice as many people to enter partial retirement as would leave full-time work, so that total full-time equivalent (FTE) employment would increase, although by a modest amount. If all benefits from personal accounts could be taken as a lump sum, the fraction not retired at age 62 would fall by about 5 percentage points compared to a system where there is mandatory annuitization of benefits.
    JEL: D31 D91 E21 H55 I3 J08 J14 J26 J32 J38
    Date: 2007–03
  24. By: Kristopher Gerardi; Harvey S. Rosen; Paul Willen
    Abstract: The U.S. mortgage market has experienced phenomenal change over the last 35 years. This paper develops and implements a technique for assessing the impact of changes in the mortgage market on households. Our framework, which is based on the permanent income hypothesis, that allows us to gauge the importance of borrowing constraints by estimating the empirical relationship between the value of a household's home purchase and its future income. We find that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects. One issue that has received particular attention is the role that the housing Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, have played in improving the market for housing finance. We find no evidence that the GSEs' activities have contributed to this phenomenon. This is true whether we look at all homebuyers, or at subsamples of the population whom we might expect to benefit particularly from GSE activity, such as low-income households and first-time homebuyers.
    JEL: D14 G21 H89
    Date: 2007–03
  25. By: David Levinson (Nexus (Networks, Economics, and Urban Systems) Research Group, Department of Civil Engineering, University of Minnesota); Andrew Odlyzko (Digital Technology Center, University of Minnesota)
    Abstract: Technology appears to be making fine-scale charging (as in tolls on roads that depend on time of day or even on current and anticipated levels of congestion) increasingly feasible. And such charging appears to be increasingly desirable, as traffic on roads continues to grow, and costs and public opposi- tion limit new construction. Similar incentives towards fine-scale charging also appear to be operating in communications and other areas, such as electricity usage. Standard economic theory supports such measures, and technology is being developed and deployed to implement them. But their spread is not very rapid, and prospects for the future are uncertain. This paper presents a collection of sketches, some from ancient history, some from current developments, that illustrate the costs that charging imposes. Some of those costs are explicit (in terms of the monetary costs to users, and the costs of implementing the charging mechanisms). Others are implicit, such as the time or the mental processing costs of users. These argue that the case for fine-scale charging is not unambiguous, and that in many cases may be inappropriate.
    Keywords: transportation, communication, transaction costs, collection costs
    JEL: R40 R41 R48 N7 N9 H4
    Date: 2007–02
  26. By: Jens Ludwig; Deborah A. Phillips
    Abstract: In this essay we review what is known about Head Start and argue that the program is likely to generate benefits to participants and society as a whole that are large enough to justify the program's costs. Our conclusions differ importantly from those offered in some previous reviews because we use a more appropriate standard to judge the success of Head Start (namely, benefit-cost analysis), draw on new accumulating evidence for Head Start's long-term effects on early cohorts of program participants, and discuss why common interpretations of a recent randomized experimental evaluation of Head Start's short-term impacts may be overly pessimistic. While in principle there could be more beneficial ways of deploying Head Start resources, the benefits of such changes remain uncertain and there is some downside risk.
    JEL: H43 I2 I3
    Date: 2007–03

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